Held to Account: Farming Divorces

Reproduced from Practical Law with the permission of the publishers. For further information, visit www.practicallaw.com.

Divorce is never easy but with a farm involved, it can be “notoriously difficult to resolve” (Wilson J in R v R [2004] FLR 98). In a society where 42% of all marriages end in divorce, farmers’ marriages are by no means the exception to the rule. In fact, farmers are arguably more exposed to the circumstances that would put a strain on any relationship, such as cash flow problems or mental health issues. Both are often generated by a poor work/life balance (more than one farmer a week in the UK commits suicide).

But why are farming cases so difficult for the courts to deal with and what issues should a family lawyer and the farming client be alive to from the outset?

In financial remedy proceedings, the court has powers to make the following orders after consideration of the family assets:

• Spousal maintenance payments.

• Child maintenance payments.

• Lump sum payments.

• Property adjustment orders (that is the idea that one spouse can keep a property).

• Pension attachment and sharing orders.

All of these powers will be considered by the court against the factors under section 25 of the Matrimonial Causes Act 1973. Often the most relevant for farming cases are the needs of the parties to help the court determine a “fair” financial outcome to be assessed with the “yardstick of equality” (White v White [2000] FLR 98 1). This established the principle that a 50/50 division of the matrimonial assets should only be departed from if there is good reason for doing so.

The difficulty in a farming case is that the farm is the couple’s home and business and can be particularly difficult to divide on divorce. In addition, this is compounded by the reality that a farm’s main asset (land) is often tied up with resulting poor liquidity. Further, it was recently reported that there has been a 17% dip in income for farmers and, in some cases, there may be so much debt in the farming assets that the non-farmer spouse may be considered fortunate to leave the marriage without having to pay off some of the liabilities.

This lack of liquidity can mean two things. Either, farmers have often been reluctant or unable to invest money in diversification of the farm or in other business ventures; and as a consequence of this, it is often the case that the only asset is the farm. In terms of any settlement, this will mean that it will be difficult to meet the farmer’s spouse’s reasonable housing and income needs without selling off farming assets. This can result in major damage to the farm and its viability.

Matrimonial and Non-Matrimonial Property

At the outset of a farming case, it will be fundamental to understand the distinction between matrimonial and nonmatrimonial property when considering the division of assets.

Matrimonial property is “property acquired during the marriage otherwise by inheritance or gift” or “the product of the parties’ financial endeavour” (P v P (inherited property) [2006] FCR 579). Whilst non-matrimonial property is generally “property acquired by a party prior to the marriage” (P v P (inherited property)), often in farming cases these are inherited assets.

From the beginning of the separation process, the farming client should be advised that non-matrimonial property, such as inherited assets, are “not off the table in a divorce context” (Lord Nicholls in White v White [2000] FLR 981: “this factor can be expected to carry little weight…in case where the claimant’s financial needs cannot be met without recourse to this [non-matrimonial] property”).

Farms tend to be generational assets that have been transferred on death for decades (sometimes even centuries), rather than on divorce. In circumstances where the needs of the non-farmer spouse cannot be met by recourse to other assets, the farm will need to be valued to see what it can provide and then distributed accordingly. This decision can cause major damage, if not be terminal to the business. If you are advising a land owner, it will be important to gather as much information as possible to show that the farm has not been intermingled on marriage and to demonstrate that it would have severe repercussions for third parties, such as other family members, business partners, tenants and trustees (to name only a few) for the farm to be handled in such a way.

This can be difficult for both parties. Even if the non-farmer spouse was to benefit from the sale of assets, it will also mean saying goodbye to the time they have invested in the business. For example, in P v P (inherited property), although it was not the wife’s family business:

“she did half the physical work in the farm yard and in the fields, she wielded a pitchfork moving silage and straw, she did much of the lambing, she went to market and the agricultural suppliers, she kept the books and made the PAYE returns…she was the only licensed sheep dip operator on the farm. On top of that she supplemented the family’s income by her work as a farming journalist”. (Paragraph 11)

This scenario needs to be dealt with, regardless of whom you are acting for. Often dealing with things jointly to avoid the duplication of costs can be a useful exercise in evidencing how the assets are owned, any development potential, tax implications of transferring and selling assets, and ascertaining the value of the farm. Sometimes this can be more complicated than first anticipated, as due to the dynastic nature of the assets there is a lack of documentation as to rights to land and how the business is structured. It may be beneficial to have a site visit, but it will be essential to consult people such as the farm accountant, land agent and their property lawyer to understand the practical arrangements of the farm and also any tax ramifications.

This will ensure that you understand practically how the assets are held and statements from these individuals could be used as part of the disclosure process.

Protective measures – Nuptial agreements

Divorce in the agricultural community is often not discussed due to the stigma attached to it and as a consequence this will not only be particularly hard on the separating couple, but also means that protective mechanisms such as pre- or post-nuptial agreements will not have been discussed and will not be in place.

Such agreements are effective at protecting assets such as farms as they allow a couple to plan pre- or post-marriage on how they will divide their assets on divorce, subject to the parties’ needs at that time. Although such agreements are not strictly binding, the landmark case of Radmacher v Grantatino [2010] UKSC 42 has made them increasingly effective. If in place and specific criteria are met then they could be of decisive weight later in court.

That being said, many farming families find the idea of a nuptial agreement at the very least unromantic and no one wants to be the one to pour cold water on the celebrations. However, in farming cases, where so many people’s interests and livelihoods are at stake, it is beneficial to think practically and manage expectations. To use the analogy of house insurance, just because you take out a policy does not mean that you are expecting your house to burn down, but if divorce was to happen, these agreements can make the painful process of dividing assets on separation much easier (and cheaper).

Court is not the only way to resolve a divorce

Divorce is an expensive process and in farming cases, where there is not much liquidity, it will be vital to keep the legal costs down. One way of doing this is to remember that getting divorced does not mean court hearings will be required. For those wanting to avoid the cost of court, considering alternatives to court would be well advised, such as negotiations between solicitors, mediation, round-table meetings and arbitration. These alternatives are not only cost-efficient but also provide privacy and flexibility, which can be useful in a farming case when the parties are worried that they will be the subject of local gossip or have to work around commitments such as the harvest. Of course, both parties’ consent is needed to use one of these alternative routes.

Despite the old adage that a farmer always hopes for rain, where divorce is concerned, without expert legal advice and protection, there is a real danger that it could pour.